Timken Jumps After Agreeing to Spin Off Steel Unit

Timken Co. (TKR) jumped to its highest
closing price ever after agreeing to spin off its steel unit,
dropping opposition to a plan pushed by Ralph Whitworth’s
Relational Investors LLC.

Chief Executive Officer James Griffith, 59, will step down
once the division is split from the larger bearings and
transmission business, probably in about a year, Timken said
yesterday. The publicly traded steel company will have $1.7
billion in annual revenue and be led by Ward Timken, 46.

“The ‘aha’ moment” for the board came after meeting with
the largest shareholders in recent months and finding that most
backed the spinoff, Griffith said in an interview yesterday.
“The perception was that we would not see a revaluation of the
company quickly -- that it would take a long time.”

Timken rose 2.1 percent to $61.52 at the close in New York,
a price that the Canton, Ohio-based company said was a record.
That extended the shares’ gain to 49 percent since Nov. 27,
2012, the day before Relational disclosed its stake in Timken
and began agitating for a breakup. The Standard & Poor’s Midcap
Industrials Index climbed 29 percent in the same period.

The spinoff is a victory for Relational and the California
State Teachers’ Retirement System, which had been pushing Timken
since November to separate the steel unit to boost shareholder
value. The proposal won support of 53 percent of stockholder
votes in May and led to a strategic review by Goldman Sachs
Group Inc. that favored the split.

‘Textbook Case’

The plan “ensures the long-term vitality and
competitiveness of Timken as two separate companies, both of
which will lead their respective industry segments for operating
excellence,” Whitworth said in a statement yesterday from
Relational and Calstrs.

Without the split, investors have been forced to buy two
units with different business profiles, Gary Farber, an analyst
at CL King & Associates in New York, said in an interview
yesterday. The bearings unit gets about 35 percent of sales from
the aftermarket and is less cyclical than the steel company,
which has little replacement revenue or service, he said.

“This is a textbook case for enhancing valuation,” said
Farber, who has a buy rating on Timken. “What unfortunately
couldn’t be recognized in the companies together, we think will
be recognized in the companies as separate entities.”

Relational’s Role

Relational, which takes stakes in companies it considers
undervalued and then lobbies for changes, said in May that the
shares could rise an additional 20 percent to 25 percent under
the spinoff plan. San Diego-based Relational held 7.9 percent of
Timken as of Aug. 2, making it the largest shareholder.

One-time transaction costs for the spinoff are expected to
be about $125 million, Timken said in a statement yesterday.
Richard Kyle, 47, will become president and CEO of the global
bearings and power transmission company, which will operate
under the Timken name. The business is expected to have annual
revenue of $3.4 billion. The split is expected to be completed
within a year. Jones Day is advising Timken on the steel unit
spinoff.

Assets, liabilities and debt will be divided between the
two companies with the aim of keeping investment-grade status
for both, Chief Financial Officer Glenn Eisenberg said in a
telephone interview yesterday. Timken will probably file a draft
of the proposed capital structures to the Securities and
Exchange Commission by the end of the year, Eisenberg said.

Bearing Business

“The bigger bearing business -- more global, less volatile
-- arguably can withstand higher leverage ratios than the
smaller, more domestic steel business,” he said.

Timken had tried to fend off Whitworth’s call to shed the
steel business, which traces its roots to World War I and
generated about a third of last year’s $4.99 billion in revenue.
The company hired Goldman Sachs to study the spinoff after a
majority of voting shareholders supported the plan.

Sales in the steel unit fell 29 percent in the second
quarter from a year earlier, due to lower demand in the oil and
gas and industrial markets, Eisenberg said on a July 25
conference call. The bearings business buys about 15 percent of
the steel unit’s production, Timken said on a conference call
today.